Dollar to build on gains as rate-hike path unlikely to narrow until Fed meets next

By Yasin Ebrahim

Investing.com -- The dollar is likely to build on its recent gains in the weeks ahead as there aren't many catalysts for bears to latch onto that could sway expectations for the three more Federal Reserve rate hikes.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.03% to 104.55.

Recent data pointing to signs of economic strength and sticky inflation “can keep the dollar supported in the near term and potentially into the 22 March FOMC meeting,” ING said in a note.

In the run-up to the March meeting, however, dollar bears will be hoping that both economic strength and inflation soften enough to cool the Fed’s hawkish stance.

While the risk grows that the Fed may lift its forecast on the peak level of rates at its meeting next month, traders will also be focused on whether the Fed’s projections, or dot plots, continue to show 100 basis points of easing in 2024. 

Fed members have been vocal in backing a higher for longer interest regime, but haven’t shown any incentive to mull the possibility of cutting rates.

The Fed’s February meeting minutes, released Wednesday, meanwhile, provided “no hints of a pause,” ING adds, and offered “very little to divert market pricing of three more 25bp hikes from the Fed over the March, May and June meetings.”

Dollar bears will be eyeing inflation data due Friday for a chance to load up on bearish bets, but are likely to be left disappointed amid expectations that price pressures have picked up pace.

“The next set of meaningful U.S. data is tomorrow's core PCE data for January - but even that is likely to see the core month-on-month reading rising to 0.4% from 0.3%,” ING added.

Others, however, suggest the recent surge in the dollar has moved out of oversold territory to areas in which it could meet resistance. 

"The dollar is no longer oversold at this point- thus further rally efforts may lose some steam and see challenges ahead as the currency approaches its 200-day MA (green line above). That indicator currently resides near the 106 zone, framing out our near-term target range of 105-106," Janney Montgomery Scott said in a note.